Upside For Wesfarmers

This story features WESFARMERS LIMITED. For more info SHARE ANALYSIS: WES

Bottom Line 17/12/14

Daily Trend: Up
Weekly Trend: Neutral
Monthly Trend: Neutral
Support levels: $39.61 / $36.66
Resistance levels: $43.01 / $45.75

Technical Discussion

Wesfarmers ((WES)) is engaged in retailing operations including supermarkets, general merchandise and specialty department stores. It is also involved in liquor and convenience outlets, retailing of home improvement and outdoor living products to name just a few. The Company operates in three main parts; Insurance, Industrial and retail. For the year ending the 30th of June 2014 revenues increased 4% to A$60.18B. Net income before extraordinary items decreased 25% to A$1.61B. Revenues echo a rise in demand for the Company's products and services due to encouraging market conditions. Broker/Analyst consensus is a comprehensive “Sell”. The dividend is 4.8%.

Reasons to remain bullish longer term:
→ Coles & Bunnings continue to perform well.
→ It has recently purchased Pacific Brands workwear division for $180m which should be a good fit for the industrial division.
→ Wes intends to open 70 new supermarkets over the next 3 years via Coles.
→ Returns could be boosted through the recent sale of its insurance business.
→ The company will benefit from any rise in the depleted price of coal.

Our headline last month was “Surged higher to take on resistance …” which meant we had to be on guard for an attempt at overcoming all-time highs.  Unfortunately buyers ran out of steam which has resulted in a significant retracement over the past few weeks.  Not that this moves us to a bearish stance over the longer term as it certainly doesn’t but it seems likely that further posturing is going to be required before another attempt at blue sky is seen.  That said, we do have bullish divergence on the daily time frame and the possibility of it developing on the weekly chart as well.  This is something we’ve started to see a lot of in various stocks over the past week or so.  It’s just a result of the broader market sell-off which has left many stocks looking severely oversold.  Like any pattern though the divergence needs to trigger before we can get too enthusiastic in regard to a decent rally unfolding.  Should it trigger on the weekly time frame a little further down the track then there is every chance that the zone of resistance just above $44.00 is going to be revisited which at the end of the day is exactly what we need to see before moving back to a bullish stance.  Bigger picture there is nothing not to like about Wesfarmers with a strong prior trend preceding the sideways consolidation that kicked in during October of last year.  All things being equal the next major move should be to the upside, albeit some patience is likely going to be required over the coming months.

Trading Strategy

An improvement in the coal market would be a big positive for WES and could well be the catalyst required to kick start the next leg higher.  We tend to focus more on the patterns and the technical side of the equation although when both fundamentals and the technicals align its time to sit up and take notice.  That isn’t the case yet but it’s something to look out for.  At this stage it’s still best to stand aside although more nimble traders could initiate positions following the bullish divergence triggering on the daily time frame.  The target at this stage is the lower boundary of the zone of resistance between $44.00 – $45.00.
 

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